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Thursday, April 3, 2008

* Turbo Charge Your Portfolio With Reinvested Dividends

It is well-documented that a significant portion of the historical equity returns are a result of reinvested dividends. In Triumph of the Optimists: 101 Years of Global Investment Returns (2002), the authors looked at equity returns from capital gains and dividends from 1900 to 2000. They determined that performance in any given year was driven by capital appreciation, but long-term returns were largely the result of reinvested dividends. Looking at 101 years of data in the U.S. and U.K., they found that a market-oriented portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains.
When most people hear the phrase dividend reinvestment, they will often associate it with dividend reinvestment plans (DRIPs). Many companies offer DRIPs through their transfer agent. Instead of sending dividend checks to shareholders enrolled in the company's DRIP, the company reinvests those dividends by purchasing additional shares (or fractional shares) in the shareholder's name. Most plans will reinvest a shareholder's dividends without a fee or commission. Some brokerages offer similar plans.

It is important to note that you can reinvest dividends without participating in a formal DRIP plan. Personally I have chosen not to participate in a formal DRIP plan. I prefer the flexibility of determining where my dividends are invested. I add them to my normal monthly investment, thus I do not incur any additional commissions.

Do you reinvest dividends through a formal program, independently or not at all?

Full Disclosure: No position in the aforementioned securities. See a list of all my income holdings here.

Important Information

Material presented on Dividend Growth Stocks is for informational and entertainment purposes only and is the opinion of the author and should NOT be relied on or taken as investing advice. The information and content should not be construed as a recommendation to invest or trade in any type of security. Neither the information, nor any opinion expressed, constitutes a solicitation of the purchase or sale of any security or investment of any kind. Before acting on anything you read on this site, you must do your own research and you must come to your own conclusion which you will ultimately be responsible for, including any loss you may incur. [More]